Monthly Archives: August 2014

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The Internal Revenue Service has reportedly filed a tax lien against actress, singer and model Vanessa Williams for $369,249 in unpaid taxes dating back to 2011.

The IRS filed the lien in New York City on August 13, according to CNN. Williams, 51, became the first African American to win the Miss America pageant in 1983, but was forced to give up the title after nude photos of her were published in Penthouse magazine.

She began a music career and released two hit albums in 1988 and 1991, generating hit songs like “Save the Best for Last” and “The Right Stuff.”

She also appeared on Broadway in 1994 in the musical version of “Kiss of the Spider Woman,” and then became a movie and TV actress, appearing in the films “Eraser,” “Soul Food,” “Dance with Me,” “Shaft,” “Johnson Family Vacation” and others. Williams also landed recurring roles in the TV series “Ugly Betty,” “Desperate Housewives” and “666 Park Avenue.”

The Internal Revenue Service recovered $576 million in erroneously issued tax refunds last year thanks to outside tips provided by financial institutions and other sources such as tax preparers, more than double the amount from three years ago.

A new report from the Treasury Inspector General for Tax Administration examined the IRS’s External Leads Program, which receives leads about questionable tax refunds identified by a variety of organizations, including financial institutions, brokerage firms, government and law enforcement agencies, state agencies and tax preparers. The questionable tax refunds include Treasury checks, direct deposits and prepaid debit cards.

The program helps the IRS to recover erroneous tax refunds and save money, but the TIGTA report noted that improvements are needed to ensure that the IRS verifies the leads on a timely basis.

The External Leads Program has grown from 10 partner financial institutions returning $233 million in calendar year 2010 to 258 partner financial institutions and partner organizations returning more than $576 million in calendar year 2013, the report noted.

“The IRS’s External Leads Program has more than doubled the amount of questionable refunds returned over the past three years, thus saving tax dollars,” said TIGTA Inspector General J. Russell George in a statement. “However, opportunities exist to improve the program.”

Since taking over the External Leads Program in January 2010, the IRS’s Wage and Investment Division has performed outreach in an effort to continuously increase the number of organizations participating in this program. Participation and the number of questionable refunds returned and the dollars associated with them have grown significantly.

However, the IRS is not always verifying leads in a timely manner, and the verification time frame goals differ significantly based on the lead type, according to the report. The goals do not take into consideration the burden on legitimate taxpayers whose refunds are being held until verification is completed.

In addition, the IRS inconsistently tracked the leads in multiple inventory systems, and the inventory systems did not provide key information such as how the lead was resolved, that is, whether the refund was confirmed as erroneously issued or legitimate.

TIGTA recommended that the IRS establish more consistent time frames to verify the leads it receives based on an analysis of the current and historical lead verification data and, once established, communicate the verification time frames with its external partners. The report also suggested the IRS develop a process to ensure that leads are verified within established time frames. The IRS should also consolidate the current four lead inventory tracking systems into a single tracking system and ensure that key information is captured as to how each lead is resolved, according to the report.

The IRS agreed with TIGTA’s recommendations. The IRS said it is evaluating the treatment streams and work processes associated with the various types of referrals received in the External Leads Program to identify appropriate time frames. The agency is also completing other systemic and procedural enhancements to improve the effectiveness of existing reporting capabilities in evaluating program quality and timeliness. In addition, the IRS is evaluating the feasibility and potential benefits of consolidating the four independent inventory tracking databases into one system.

“The IRS is committed to the proactive detection of fraudulent refund claims and preventing their payment from occurring,” wrote Debra Holland, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Unfortunately, those individuals who commit fraud against the U.S. taxpayers continually modify their tactics to evade or avoid detection, which sometimes results in the issuance of erroneous refunds. Since 2010, the IRS has reached out to financial institutions, government entities, federal agencies, software providers and other stakeholders to develop processes whereby those partners may alert the IRS to suspected refund fraud, and return those funds to the Treasury when the suspected fraud is confirmed.”

Taking money out early from your retirement plan may trigger an additional tax. Here are seven things that you should know about early withdrawals from retirement plans:

1. An early withdrawal normally means taking money from your plan before you reach age 59 1/2.

2. If you made a withdrawal from a plan last year, you must report the amount you withdrew to the IRS. You may have to pay income tax as well as an additional 10 percent tax on the amount you withdrew.

3. The additional 10 percent tax does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost to participate in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.

4. A rollover is a type of nontaxable withdrawal. Generally, a rollover is a distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. You usually have 60 days to complete a rollover to make it tax-free.

5. There are many exceptions to the additional 10 percent tax such as using the money for qualified higher education expenses or unreimbursed medical expenses in excess of 10 percent of adjusted gross income. Some of the exceptions for retirement plans are different from the rules for IRAs.

6. If you make an early withdrawal, you may need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with your federal tax return.

The rules for retirement plans can be complex, but we’re here to help. Give us a call today. We’ll make sure you file the right tax forms and help you get the tax benefits you’re entitled to.

The IRS reminds newlyweds to add a health insurance review to their to-do list. This is particularly important if you receive premium assistance through advance payments of the premium tax credit through a Health Insurance Marketplace.

If you, your spouse or a dependent gets health insurance coverage through the Marketplace, you need to let the Marketplace know you got married. Informing the Marketplace about changes in circumstances, such as marriage or divorce, allows the Marketplace to help make sure you have the right coverage for you and your family and adjust the amount of advance credit payments that the government sends to your health insurer.

Reporting the changes will help you avoid having too much or not enough premium assistance paid to reduce your monthly health insurance premiums. Getting too much premium assistance means you may owe additional money or get a smaller refund when you file your taxes. Getting too little could mean missing out on monthly premium assistance that you deserve. You should also check whether getting married affects your, your spouse’s, or your dependents’ eligibility for coverage through your employer or your spouse’s employer, because that will affect your eligibility for the premium tax credit.

Other changes in circumstances that you should report to the Marketplace include:

the birth or adoption of a child,

divorce,

getting or losing a job,

moving to a new address, gaining or losing eligibility for employer or government sponsored health care coverage, and

any other changes that might affect family composition, family size, income or your enrollment.

In addition, certain life events – like marriage – give you and your spouse the opportunity to sign up for health care during a special enrollment period. That means that if one or both of you is uninsured, you may be able to get coverage now. In most cases, the special enrollment period for Marketplace coverage is open for 60 days from the date of the life event.

U.S. taxpayers reported $9.1 trillion in adjusted gross income (less deficit) for tax year 2012, according to the most recent IRS Statistics of Income Bulletin.

Statistics of Income – 2012, Individual Income Tax Returns, which was released on Friday, reported that taxpayers filed 144.9 million individual tax returns for 2012, down 0.3 percent from 2011. The AGI less deficit of $9.1 trillion represents an 8.7 percent increase from the previous year.

The SOI includes estimates on sources of income, AGI, exemptions, deductions, taxable income and more.

The Tax Court sided with the plaintiff in a recent case involving the rules surrounding the home office deduction. The deduction is allowed for the portion of a residence that is used exclusively and on a regular basis as the principal place of business for a taxpayer.

Setting aside an area of the dwelling for exclusive use is not always easy, however. In Lauren Miller’s case, the IRS challenged her deduction for the expenses allocable to one-third of her New York City studio apartment of 700 square feet.

Miller was employed by BrandingIron Worldwide (BIW), a company that provides public relations, advertising, and marketing services. BIW is headquartered in Los Angeles, while at the time she was hired, Miller was BIW’s only employee in New York.

Miller used part of her apartment as an office throughout 2009. BIW listed her apartment address and telephone number on its Web site as the address and phone number for its New York office. Miller usually worked weekdays between 9 a.m. and 7 p.m., but was generally expected to be available at all times.

Miler’s studio apartment, a single room, was divided into three equal sections: an entryway, a bathroom, and a kitchen area; office space, including a desk, two shelving units, a bookcase, and a sofa; and a bedroom area including a platform bed and dressers. Miller has to pass through the office space to get to the bedroom area.

Miller frequently met with BIW clients in the office space, and she performed work for BIW using a computer on the desk. The bookcase and shelving units were used to store books, magazines, supplies and samples related to her work for BIW and its clients. Although she used the office space primarily for business purposes, she occasionally used the space for personal purposed. BIW did not reimburse Miller for any of the expenses related to her apartment.

The Tax Court, in Summary Opinion 2014-74, noted that if the taxpayer is an employee, the deduction for a home office is only allowable if the exclusive use of the office space is for the convenience of the taxpayer’s employer. In Miller’s case, BIW listed her apartment address on its Web site as its New York office address, and Miller “testified credibly that she regularly used one-third of her apartment space as an office to conduct BIW business, she met with clients there, and she was expected to be available to work well into the evening.”

The court agreed with Miller that her apartment was her principal place of business, that she was obliged to use the space as an office for the convenience of her employer, and that BIW was not able or willing to reimburse her for any of her apartment-related expenses.

“Although Petitioner admitted that she used portions of the office space for nonbusiness purposes, we find that her personal use of the space was de minimis and wholly attributable to the practicalities of living in a studio apartment of such modest dimensions.”

Therefore, the court concluded that Miller was entitled to the home office deduction.

If you are looking for a tax deduction, giving to charity can be a “win-win” situation–good for them and good for you. Here are eight things you should know about deducting your gifts to charity:

1. You must donate to a qualified charity if you want to deduct the gift. You can’t deduct gifts to individuals, political organizations or candidates.

2. In order for you to deduct your contributions, you must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with your federal tax return.

3. If you get a benefit in return for your contribution, your deduction is limited. You can only deduct the amount of your gift that’s more than the value of what you got in return. Examples of such benefits include merchandise, meals, tickets to an event or other goods and services.

4. If you give property instead of cash, the deduction is usually that item’s fair market value. Fair market value is generally the price you would get if you sold the property on the open market.

5. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.

6. You must file Form 8283, Noncash Charitable Contributions, if your deduction for all noncash gifts is more than $500 for the year.

7. You must keep records to prove the amount of the contributions you make during the year. The kind of records you must keep depends on the amount and type of your donation. For example, you must have a written record of any cash you donate, regardless of the amount, in order to claim a deduction. It can be a cancelled check, a letter from the organization, or a bank or payroll statement. It should include the name of the charity, the date and the amount donated. A cell phone bill meets this requirement for text donations if it shows this same information.

8. To claim a deduction for donated cash or property of $250 or more, you must have a written statement from the organization. It must show the amount of the donation and a description of any property given. It must also say whether the organization provided any goods or services in exchange for the gift.

Questions about charitable donations? Don’t hesitate to give us a call.

Children who receive investment income are subject to special tax rules that affect how parents must report a child’s investment income. Some parents can include their child’s investment income on their tax return, while other children may have to file their own tax return. If a child cannot file his or her own tax return for any reason, such as age, the child’s parent or guardian is responsible for filing a return on the child’s behalf.

Here’s what you need to know about tax liability and your child’s investment income.

1. Investment income normally includes interest, dividends, capital gains and other unearned income, such as from a trust.

2. Special rules apply if your child’s total investment income in 2014 is more than $2,000 (same as 2013). The parent’s tax rate may apply to part of that income instead of the child’s tax rate.

3. If your child’s total interest and dividend income is less than $10,000 (same as 2013), then you may be able to include the income on your tax return. If you make this choice, the child does not file a return. Instead, you file Form 8814, Parents’ Election to Report Child’s Interest and Dividends, with your tax return.

4. If your child received investment income of $10,000 or more in 2014 (same as 2013), then he or she will be required to file Form 8615, Tax for Certain Children Who Have Investment Income of More Than $2,000, with the child’s federal tax return for tax year 2014.

Starting in 2013, a child whose tax is figured on Form 8615, Tax for Certain Children Who Have Unearned Income, may be subject to the Net Investment Income Tax. NIIT is a 3.8 percent tax on the lesser of either net investment income or the excess of the child’s modified adjusted gross income that is over a threshold amount.

If you have any questions about tax rules for your child’s investment income in 2014, don’t hesitate to send us an email or give us a call.

Some natural disasters are more common in the summer. But major events such as hurricanes, tornadoes and fires can strike at any time, so it’s a good idea to plan for what to do in case of a disaster. You can help make your recovery easier by keeping your tax and financial records safe. Here are some basic steps you can take now to prepare:

1. Backup Records Electronically. Many people receive bank statements by email. This is a good way to secure your records. You can also scan tax records and insurance policies onto an electronic format. You can use an external hard drive, CD or DVD to store important records. Be sure you back up your files and keep them in a safe place. If a disaster strikes your home, it may also affect a wide area. If that happens you may not be able to retrieve your records.

2. Document Valuables. Take photos or videos of the contents of your home or business. These visual records can help you prove the value of your lost items. They may help with insurance claims or casualty loss deductions on your tax return. You should store them with a friend or relative who lives out of the area. The IRS has a disaster loss workbook, Publication 584, which can help taxpayers compile a room-by-room list of belongings.

3. Update Emergency Plans. Review your emergency plans every year. Personal and business situations change over time as do preparedness needs, so update them when your situation changes. Make sure you have a way to get severe weather information and have a plan for what to do if threatening weather approaches. In addition, when employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.

4. Get Copies of Tax Returns or Transcripts. Use Form 4506, Request for Copy of Tax Return, to replace lost or destroyed tax returns or need information from your return. You can also file Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript or Form 4506-T, Request for Transcript of Tax Return. Don’t hesitate to contact us if you need assistance filling this form out.

5. Check on Fiduciary Bonds. Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.

6. Count on us. If you fall victim to a disaster, we are here to help you with any disaster-related tax issues you might have.

Employer-sponsored retirement plans have become a key component for retirement savings. They are also an increasingly important tool for attracting and retaining the high-quality employees you need to compete in today’s competitive environment.

Besides helping employees save for the future, however, instituting a retirement plan can provide you, as the employer, with benefits that enable you to make the most of your business’s assets. Such benefits include:

Tax-deferred growth on earnings within the plan

Current tax savings on individual contributions to the plan

Immediate tax deductions for employer contributions

Easy to establish and maintain

Low-cost benefit with a highly-perceived value by your employees

Here’s an overview of four retirement plans options that can help you and your employees save:

SIMPLE: Savings Incentive Match Plan

A SIMPLE IRA plan allows employees to contribute a percentage of their salary each paycheck and to have their employer match their contribution. Under SIMPLE IRA plans, employees can set aside up to $12,000 in 2014 (same as 2013) by payroll deduction. If the employee is 50 or older then they may contribute an additional $2,500. Employers can either match employee contributions dollar for dollar – up to 3 percent of an employee’s wage – or make a fixed contribution of 2 percent of pay for all eligible employees instead of a matching contribution.

SIMPLE IRA plans are easy to set up by filling out a short form. Administrative costs are low and much of the paperwork is done by the financial institution that handles the SIMPLE IRA plan accounts. Employers may choose either to permit employees to select the IRA to which their contributions will be sent, or to send contributions for all employees to one financial institution. Employees are 100 percent vested in contributions, get to decide how and where the money will be invested, and keep their IRA accounts even when they change jobs.

SEP: Simplified Employee Pension Plan

A SEP plan allows employers to set up a type of individual retirement account – known as a SEP-IRA – for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to whichever is less: 25 percent of an employee’s annual salary or $52,000 in 2014 ($51,000 in 2013). SEP plans can be started by most employers, including those that are self-employed.

SEP plans have low start-up and operating costs and can be established using a single quarter-page form. Businesses are not locked into making contributions every year. You can decide how much to put into a SEP each year – offering you some flexibility when business conditions vary.

401(k) Plans

401(k) plans have become a widely accepted savings vehicle for small businesses and allows employees to contribute a portion of their own incomes toward their retirement. The employee contributions, not to exceed $17,500 in 2014 (same as 2013), reduce a participant’s pay before income taxes, so that pre-tax dollars are invested. If the employee is 50 or older then they may contribute another $5,500 in 2014 (same as 2013). Employers may offer to match a certain percentage of the employee’s contribution, increasing participation in the plan.

Profit-Sharing Plans

Employers also may make profit-sharing contributions to plans that are unrelated to any amounts an employee chooses to contribute. Profit-sharing Plans are well suited for businesses with uncertain or fluctuating profits. In addition to the flexibility in deciding the amounts of the contributions, a Profit-Sharing Plan can include options such as service requirements, vesting schedules and plan loans that are not available under SEP plans.

Contributions may range from 0 to 25 percent of eligible employees’ compensation, to a maximum of $52,000 in 2014 ($51,000 in 2013) per employee. The contribution in any one year cannot exceed 25 percent of the total compensation of the employees participating in the plan. Contributions need not be the same percentage for all employees. Key employees may actually get as much as 25 percent, while others may get as little as 3 percent. A plan may combine these profit-sharing contributions with 401(k) contributions (and matching contributions).

Call Us First

Pension rules are complex, and the tax aspects of retirement plans can also be confusing, so call us first. We’ll help you find the right plan for you and your employees.